Taxes should not be the only driving force of a business or personal decision, but they do have to be carefully considered. These taxes include income taxes resulting from business operations and business sales, as well as estate and gift taxes involved in transferring personal assets during life and on death.
We work with our clients and their other advisors to decide what tax structure is best for them – in the short term and long term. To appropriately plan for future tax consequences, we talk with each client, examining personal and business goals, current finances and proposed needs and wants, current structures, and family and business plans.
This means looking at client plans and needs such as…
- Should the client’s business structure be changed – perhaps they should elect Subchapter “S” status or consider a limited liability company.
- Buying any new business real estate in a separate LLC that can be owned by the business owner and used to transfer wealth to or reallocate wealth among other family members.
- Creating deferred compensation plans for key employees to provide them with the incentive to stay with the business and to help the business grow, but these have to be carefully drafted to ensure that the tax laws do not create some surprising results. For example, unanticipated taxes result from the company’s right to “prepay” these amounts at will.
- Creating a special partnership tax structure so that the investors who put money into the company get their investment back first, with a preferred return, while still encouraging other owners to participate in the growth and be rewarded for their services and expertise.
- Generation-skipping trusts to save estate taxes on the transfer of wealth to multiple generations.
- Allocation of assets among spouses and children to save estate taxes and income taxes.
It is possible, of course, to always rely on a client’s accountant to make all of the tax planning decisions, but a team approach among advisors gives the client a better overall plan. Taking care of the family as well as the employees, having the business be more profitable for the owner, and keeping taxes low – these are the goals of every client. We help them achieve these goals.
MB Law in Action – Featured Client Case Studies
Case Study: The Company is an LLC Taxed as a Partnership, but the Owner is Tired of that Heavy Personal Tax Burden Every Year.
Our Client’s Objective: Our client asked, “Is there a way to decrease my income taxes?”
MB Approach: Business taxes are a fact of life, but sometimes they can be limited. The client wanted to become a “C” corporation because “a friend said that would be best.” We talked with our client about the company’s current and past structure, and we looked at its company documents and tax returns. We spoke with the company’s accountant and our client, considering options such as electing Subchapter “S” tax treatment or just revising the partnership tax structure. In the end, we collectively concluded that the company and its owners would benefit from converting to a Subchapter “S” corporation.
What’s Next? The owner is able to reduce the tax burden, and also know that on a sale of the business, the tax bill will be lower than it might otherwise be. We will be revising the company’s documents for the new structure.
There is no reason to pay more tax than necessary. There are many options to consider, and there are non-tax considerations that also need to be evaluated with each tax decision. Partnership tax treatment may be very flexible, but is it really the best after-tax structure when FICA is taken into account? It may be great to find an investor, but if they require the company to become a “C” corporation is that worthwhile? If the parent includes children as owners of the family partnership, is the parent really willing to give up that portion of the partnership's annual income?
This is where we come in. We help Colorado businesses and families develop plans and structures that meet their tax and personal goals. These include:
- The choice of business structure, or the formation of a new entity or entities.
- Offering key employees deferred compensation plans that comply with tax requirements.
- Choosing to gift assets to children and grandchildren during life as opposed to waiting until death.
We look at taxes for the business during its life and on sale, as well as gift taxes on family transfers and estate taxes on death, finding ways to limit taxes to achieve each client’s goals.